There are many many reasons that it would be much better if we in the US had a more progressive distribution of both income and wealth. However, capital formation is not one of them. In terms of generating the capital necessary to start new businesses or to expand existing businesses, it is probably true that a degree of concentration has some advantages. One advantage is that those with a large amount of wealth are likely to be more willing to risk large sums on risky deals because - up to a certain level - it will not really put them at risk. The other reason is that the cost of raising money from a small number of large investors is probably a lot lower than the cost of raising numerous small amounts from thousands of small investors. Thus, lumpy capital may create a better environment for new businesses to flourish. At some point, excessive concentration - e.g., the town or region in which one family has all the wealth, is bad because it can create a situation in which the idiosyncratic investment restrictions imposed by one or a small number of investors can exclude certain promising ventures from financing. But we are in no way at or near that level of concentration - we have a wide variety of very wealthy and, in some cases, eccentric potential investors.
Phil, you're right that concentration has real advantages for business finance, and I don't want to dismiss either point — the risk-bearing argument and the transaction cost argument are both legitimate and well-grounded. Lumpy capital does facilitate certain kinds of investment that diffuse capital can't easily replicate.
But, I think you and I see "capital formation" in slightly, but importantly, different ways. You're using it in the standard sense of funding business investment, which is entirely reasonable. But I'm also concerned with something broader: the capacity of ordinary households to accumulate surplus for their own purposes — buffering against unexpected catastrophe, funding education, maintaining economic autonomy, pursuing the Lincoln pathway of self-directed development. These aren't business finance functions, but they're real and important ones, and a system that optimizes for business finance efficiency while structurally preventing Q1–Q3 households from saving has made a value choice that I think deserves explicit recognition.
I'd also gently push back on the threshold question. You suggest we're nowhere near the level of concentration at which idiosyncratic elite investor preferences start excluding promising ventures. That may be true in venture capital markets. But in labor markets, the evidence on monopsony power suggests we're closer to that threshold than we might think — and in residential real estate, the increasing consolidation of housing stock in institutional hands is producing exactly the rent-extraction dynamic that I argue suppresses broad accumulation. So the question of "how much concentration is too much" may have different answers in different markets.
But your broader point stands as a genuine tension: it's entirely possible that broad accumulation, rather than elite concentration, produces less efficiency in business finance. I accept that. My response is simply that the economic system exists to serve the needs of people, not the other way around. If we have to choose between a system that is somewhat less efficient at funding businesses but broadly enables household accumulation, and one that is more efficient at funding businesses but structurally prevents the median household from saving, I know which one I'd call more capitalist — and more worth having.
I think it is legitimate to make a distinction between capital - an investment which one makes and may never get back and certainly has no expectation of an immediate return - and a rainy day fund which one maintains in a fairly liquid state so that it can be deployed for college tuition, uncovered medical expenses, a down payment on a house, expensive home or auto repairs, etc. The American economy really requires people to maintain some form of liquidity for these purposes - although it may be in the form of untapped credit card lines. But capital is generally thought of as business equipment which is bought with funds committed to the enterprise which are not returnable upon demand and may never be returned. And then there is retirement saving - more important since the 80's as defined benefit private pensions have disappeared. So I agree that it would be better if we had a more level income distribution so that people could put aside rainy day funds and retirement funds and even make capital investments. But I think that those are 3 separate things. The self-employed start up entrepreneur who buys equipment in order to start of business often thinks of his investment as partially recoverable (if he abandons the business, he can sell the truck he is using for 80% of the purchase price or unrecoverable - the attorneys fees incurred to incorporate the business) and thinks of only a portion of the capital investment as being "at risk." I think that at the micro level a lot of start up funds come from debt - credit card debt, ELOC's, small business loans, etc. - rather than from true savings.
Phil, this is a useful clarification and I think you're right that those are three analytically distinct things — rainy day liquidity, retirement saving, and business capital — with different risk profiles, time horizons, and policy implications. I should have been more precise about which I was measuring and why.
What APS captures is the margin between income and consumption — the fraction of income not immediately spent, regardless of what it's subsequently used for. My argument doesn't require that Czech Q1-Q3 households are forming business capital specifically. It only requires that they have a positive margin from which any of your three categories can be funded. US Q1-Q3 households, running persistently negative APS, cannot fund any of the three — not rainy day reserves, not retirement, and certainly not business capital. The prior claims on their income — rent, debt service, consumer credit interest — are consuming the margin before any allocation decision becomes possible.
Your point about debt-financed startup is accurate at the micro level, and important. But it actually reinforces the concern rather than alleviating it. Debt-financed entrepreneurship requires creditworthiness — an asset base, stable income, positive net worth — to access in the first place. A household already running negative APS and carrying high-interest consumer debt is poorly positioned to layer entrepreneurial debt on top. The credit channel you describe is real, but it's considerably more accessible to Q4-Q5 than to Q1-Q3. So the inability to save isn't just a rainy day problem — it's also a barrier to the debt-financed startup pathway you're describing.
Where I think we fully agree is that a more equitable income and wealth distribution would be better. The question I'm pressing is whether the mechanisms currently producing our unlevel distribution are features of capitalism properly understood, or departures from it. I'd argue the latter, which is why I frame the policy response as restorative rather than redistributive. I'll try to address your perspectives in future essays.
There are many many reasons that it would be much better if we in the US had a more progressive distribution of both income and wealth. However, capital formation is not one of them. In terms of generating the capital necessary to start new businesses or to expand existing businesses, it is probably true that a degree of concentration has some advantages. One advantage is that those with a large amount of wealth are likely to be more willing to risk large sums on risky deals because - up to a certain level - it will not really put them at risk. The other reason is that the cost of raising money from a small number of large investors is probably a lot lower than the cost of raising numerous small amounts from thousands of small investors. Thus, lumpy capital may create a better environment for new businesses to flourish. At some point, excessive concentration - e.g., the town or region in which one family has all the wealth, is bad because it can create a situation in which the idiosyncratic investment restrictions imposed by one or a small number of investors can exclude certain promising ventures from financing. But we are in no way at or near that level of concentration - we have a wide variety of very wealthy and, in some cases, eccentric potential investors.
Phil, you're right that concentration has real advantages for business finance, and I don't want to dismiss either point — the risk-bearing argument and the transaction cost argument are both legitimate and well-grounded. Lumpy capital does facilitate certain kinds of investment that diffuse capital can't easily replicate.
But, I think you and I see "capital formation" in slightly, but importantly, different ways. You're using it in the standard sense of funding business investment, which is entirely reasonable. But I'm also concerned with something broader: the capacity of ordinary households to accumulate surplus for their own purposes — buffering against unexpected catastrophe, funding education, maintaining economic autonomy, pursuing the Lincoln pathway of self-directed development. These aren't business finance functions, but they're real and important ones, and a system that optimizes for business finance efficiency while structurally preventing Q1–Q3 households from saving has made a value choice that I think deserves explicit recognition.
I'd also gently push back on the threshold question. You suggest we're nowhere near the level of concentration at which idiosyncratic elite investor preferences start excluding promising ventures. That may be true in venture capital markets. But in labor markets, the evidence on monopsony power suggests we're closer to that threshold than we might think — and in residential real estate, the increasing consolidation of housing stock in institutional hands is producing exactly the rent-extraction dynamic that I argue suppresses broad accumulation. So the question of "how much concentration is too much" may have different answers in different markets.
But your broader point stands as a genuine tension: it's entirely possible that broad accumulation, rather than elite concentration, produces less efficiency in business finance. I accept that. My response is simply that the economic system exists to serve the needs of people, not the other way around. If we have to choose between a system that is somewhat less efficient at funding businesses but broadly enables household accumulation, and one that is more efficient at funding businesses but structurally prevents the median household from saving, I know which one I'd call more capitalist — and more worth having.
I think it is legitimate to make a distinction between capital - an investment which one makes and may never get back and certainly has no expectation of an immediate return - and a rainy day fund which one maintains in a fairly liquid state so that it can be deployed for college tuition, uncovered medical expenses, a down payment on a house, expensive home or auto repairs, etc. The American economy really requires people to maintain some form of liquidity for these purposes - although it may be in the form of untapped credit card lines. But capital is generally thought of as business equipment which is bought with funds committed to the enterprise which are not returnable upon demand and may never be returned. And then there is retirement saving - more important since the 80's as defined benefit private pensions have disappeared. So I agree that it would be better if we had a more level income distribution so that people could put aside rainy day funds and retirement funds and even make capital investments. But I think that those are 3 separate things. The self-employed start up entrepreneur who buys equipment in order to start of business often thinks of his investment as partially recoverable (if he abandons the business, he can sell the truck he is using for 80% of the purchase price or unrecoverable - the attorneys fees incurred to incorporate the business) and thinks of only a portion of the capital investment as being "at risk." I think that at the micro level a lot of start up funds come from debt - credit card debt, ELOC's, small business loans, etc. - rather than from true savings.
Phil, this is a useful clarification and I think you're right that those are three analytically distinct things — rainy day liquidity, retirement saving, and business capital — with different risk profiles, time horizons, and policy implications. I should have been more precise about which I was measuring and why.
What APS captures is the margin between income and consumption — the fraction of income not immediately spent, regardless of what it's subsequently used for. My argument doesn't require that Czech Q1-Q3 households are forming business capital specifically. It only requires that they have a positive margin from which any of your three categories can be funded. US Q1-Q3 households, running persistently negative APS, cannot fund any of the three — not rainy day reserves, not retirement, and certainly not business capital. The prior claims on their income — rent, debt service, consumer credit interest — are consuming the margin before any allocation decision becomes possible.
Your point about debt-financed startup is accurate at the micro level, and important. But it actually reinforces the concern rather than alleviating it. Debt-financed entrepreneurship requires creditworthiness — an asset base, stable income, positive net worth — to access in the first place. A household already running negative APS and carrying high-interest consumer debt is poorly positioned to layer entrepreneurial debt on top. The credit channel you describe is real, but it's considerably more accessible to Q4-Q5 than to Q1-Q3. So the inability to save isn't just a rainy day problem — it's also a barrier to the debt-financed startup pathway you're describing.
Where I think we fully agree is that a more equitable income and wealth distribution would be better. The question I'm pressing is whether the mechanisms currently producing our unlevel distribution are features of capitalism properly understood, or departures from it. I'd argue the latter, which is why I frame the policy response as restorative rather than redistributive. I'll try to address your perspectives in future essays.
Thanks again!